Commodity prices have fallen from their meteoric highs and the Aussie dollar has fallen too. Most economists including those at the CBA, expect inflation to rise from here. Australia may have avoided many of the health impacts of the pandemic but because the country was relatively slow to reopen, the inflationary forces have been delayed. Now, prices are facing the 14.6% Fibonacci retracement level at 95.97 as immediate resistance.
Westpac chief economist Bill Evans downgraded his forecast for the Australian dollar on Friday in response to the Fed meeting. The Federal Reserve raised rates by 0.75 percentage points for a third straight time on Wednesday and signalled the funds rate could reach a high of 4.6 per cent in 2023, causing yields to climb and sparking a sell-off on Wall Street. “[The dollar would need to fall a] long way and lags typically 12 months-to-two years,” Alan Oster says.
Will the Australian dollar get stronger against the US dollar in 2023?
Such a shift in the exchange rate – if not more – is what private economists are tipping. Pundits had widely tipped the RBNZ to become the first major central bank to hike rates following last month’s decision to end its quantitative easing program. The strength or weakness of the Australian dollar exchange rate is also impacted by the value of the other currency. For example, if the US dollar gets stronger in its own right, then all other things being equal, the Australian dollar will weaken and the AUD to USD exchange rate will fall. The Aussie Dollar is under downward pressure due to increased risk aversion sentiment in the market.
- Elsewhere, ING’s Australian dollar forecast for 2023 saw the AUD/USD exchange rate at 0.71 by the fourth quarter of the year, as of 13 December.
- Excluding that dip, and a sharper one during the early Covid pandemic panic – when it was buying only about US57c – the dollar hasn’t been this weak against the greenback since the global financial crisis in 2009.
- It is increasingly likely that the Australian economy will outperform many other countries which is often a magnet for global investment funds.
- Largely, it comes down to the US dollar traditionally providing a safe haven status in times of market stress.
- Most global currencies rose from their bottoms against the US dollar in November 2022 after October US inflation data came in lower than expected.
The UK is on the buying end of those higher commodity prices, with Europe in the grips of an energy crisis. Market participants expected that the Chinese economy would pick up steam after the cancellation of its zero-Covid policy. Therefore, the local authorities have even initiated measures to stimulate the economy.
Global wheat prices rise sharply after a UN-brokered deal to ship grain out of Ukraine ended last month, with effects on inflation and food security. Australia may be a major trading nation, shipping vast amounts of minerals, black swan event examples energy and food to the rest of the world, but we are a relatively small economy. However, he noted, recent declines in the Australian dollar against the greenback have been much less on a trade-weighted basis.
Shorter-term factors and developments in other financial markets
Last year saw a fluctuation for the price of AUD, with ongoing global crises affecting the market significantly. As the RBA explains, Australia has a floating exchange rate, “meaning the movements in the Australian dollar exchange rate are determined by the demand for, and supply of, Australian dollars in the foreign exchange market”. The RBA typically doesn’t publish a range of scenarios but it did explore what the effects of currency forex trading for beginners changes would be on other forecasts in a 2019 monetary policy statement. It examined what a sustained 5% depreciation of the exchange rate would do, but the reverse can also be assumed if the dollar strengthened. The RBA said that Australia had a floating exchange rate, “meaning the movements in the Australian dollar exchange rate are determined by the demand for, and supply of, Australian dollars in the foreign exchange market”.
The latest figures from the ABS showed that inflation in Australia in the last quarter between March and June increased by 0.8%. Prices were 3.8% higher than a year before when the country was in the early stages of the first national lockdown.
It would also be the Fed’s fourth rate hike of that magnitude, as it desperately tries to bring down inflation, which has risen to a 40-year high. The former chair of the ACCC says taxes must rise if the federal government wants to deliver the essential services Australians demand. The Australian dollar fell as low as 63.23 US cents on Monday afternoon, its lowest level in two-and-half years.
‘Growing risk’ of Aussie dollar falling below US70¢
The greenback, meanwhile, extended its rally, benefiting from a safe haven bid overnight on the back of softer US data releases and risk averse trading, which was similarly evident across equity markets. The inaction was “in the context of the government’s imposition of Level 4 COVID restrictions on activity across New Zealand,” the central bank said. Although price pressures in Australia have come off peak levels, annual inflation still remained uncomfortably high. The current annual inflation rate in Australia is 7.8%, according to ABS data released on 25 January 2023. The Australian dollar (AUD) hit an over four-month high against the US dollar (USD) in January 2023 as greenback weakness extended into the new year on expectations of slower interest rate hikes by the US Federal Reserve (Fed).
That extra stimulus in the economy would have counteracted the Bank of England’s measures to try to slow the rate of inflation. Already struggling in poor economic conditions, the British pound went into freefall last week after the UK government announced tax cuts for higher earners that were to be funded by borrowings. Some of our other trading partners are having a much rougher time of it than Australia. They are seeing their currencies fall while ours is stronger against them. “Our members in the importing community have had a really rough three years — they’ve had COVID-related supply chain crises, that flows into sky high shipping rates, and also our biosecurity agency is quite chronically challenged. This chart shows that even in a year that hasn’t been particularly strong for the USD, it has been performing relatively well against the AUD.
The drop in commodity prices is also acting as a limiting factor on the upside potential of the AUD/USD pair. Australia’s monthly Consumer Price Index (CPI) has rebounded from July’s reading, which could be attributed to the increasing energy prices. This expected increase in inflation has raised anticipations of another interest rate hike by the Reserve Bank of Australia (RBA). However, the AUD failed to gain traction despite positive Consumer Price Index (CPI) figures. As ANZ head of FX research Mahjabeen Zaman explained, it was anticipated that the AUD to USD exchange rate will fluctuate around its current levels before eventually appreciating in the second half of 2023.
Commodity exports to China make up a big portion of the economy so a drop in these exports, directly impacts the Australian economy and drives down the value of the currency. The US economy’s surprising strength has led to expectations that the federal reserve will raise its key interest rate again beyond the July increase to a range of 5.25%-5.5%. But the US dollar is the comparison currency Australians typically hear about. Although only a small portion of bilateral trade is done with the US, most of Australia’s exports are US dollar-denominated commodities, so the exchange rate matters. GDP growth would be roughly half a percentage point lower than in the central forecasts at that time with a 5% stronger dollar.
Whether it’s a good time for you to buy Australian dollars will depend on your own research. But activity indicators will be a guide to the extent that demand and hence inflationary pressures are abating,” said ANZ Research. Data from Westpac, the Australian dollar was 0.738 cents to the US dollar in March 2022. At the time of writing on 14 April, AUD/USD stood at about 0.673, having retreated slightly from the 0.7 range – its highest level since late August 2022. Oil prices are still near a five-week high, despite Brent crude futures slipping 0.8 per cent, to $US97.17 a barrel.
Reuters-polled economists are expecting US headline consumer price inflation to slow down to 8.1 per cent, when the data is released on Thursday evening (AEDT). The European Central Bank (ECB) is also expected to lift rates by 0.75 percentage points, while the Bank of England is tipped to announce an increase of at least 1 percentage point (or 100 basis points) at its next meeting. It suggests the US economy is still performing strongly, fuelling bets that its central bank, the Federal Reserve, will continue hiking interest aggressively to the point it may trigger trailing take profit an economic downturn. The ‘risk off’ mood was sparked by US job figures, released on Friday, which showed 263,000 roles were added to the American economy in September, and the unemployment rate had fallen to 3.5 per cent, near its lowest level in 50 years. Inflation across the world have a huge impact on interest rates which, in turn, changes the value of each currency and exchange rate. “We expect the US dollar to stabilise once the Federal Reserve slows or approaches the end of its interest rate hiking cycle and when global growth is synchronised,” Zaman says.